An introduction to

bookkeeping

At Clear Books, we aim to make accounting as simple as possible — so

you can spend less time worrying about keeping track of your accounts
and more time growing your business.

With this in mind, we’ve created a handy guide to the basics of

bookkeeping, which will help you get started — or refresh your memory.

Clear Books Must reads | August 2015

 The beginning:

Debits and credits

Most businesses will use a system known as ‘double entry bookkeeping’ to manage
their finances.

This means that every transaction will be entered into your accounting records
twice— once as a debit [Dr] entry and once as an equal and opposite credit [Cr]
entry.

Double-entry bookkeeping is preferable to single entry bookkeeping (where there is

no corresponding opposite transaction) as, by entering it twice, there is less chance
of making mistakes.

The easiest example to demonstrate this is by thinking of a shop making a cash

sale, it ‘debits’ its cash record, reflecting the increase in the money in the till, and
‘credits’ the sale record to reflect the fact that an extra sale has been made.

The overall rule of thumb that covers the majority of entries in the books is that:

Debits will increase assets or expenses

Credits will increase income or liabilities

Clear Books Must reads | August 2015

 Examples of debits Examples of credits

Assets Liabilities
Cars, computers, stock, cash, or
money owed to you by customers
Expenses
Travel, materials, salaries,
bank charges
An asset is something that you own
or an amount that someone (a
debtor) owes you, and an expense
is a cost needed to run your
business.
Bank overdraft, money you owe a
supplier, or a loan from a bank or
person
Income
sales of goods, fees charged for
services, rental income or interest
earned
A liability is something that you
owe to somebody (a creditor) and
income is earnings from running
your business.

But how do you manage and think about debits and credits, if seemingly good
things are bad and bad things are good?
The overall rule of thumb that covers the majority of entries in the books is that:

Asset (debit) GOOD Liability (credit) BAD

Expense (debit) BAD Income (credit) GOOD

Short term or long term?

In addition, to make it easier to manage, we define assets as being:

Fixed (>1 year) e.g. cars, computers and buildings or;

Current (<1year), e.g. stock, money, amounts owed by customers.

Clear Books Must reads | August 2015

 Examples of debits
In other words, a Fixed Asset is something that we are going to hold on to for a few
years whereas a Current Asset is something that that changes on a regular basis.

Liabilities too can be short or long term:

Long term (>1year) e.g. a 5 year bank loan

Short term (< year) e.g. money you owe to suppliers or a bank overdraft.

Accounts
It is worth mentioning that when we talk about the individual accounting ‘records’
above, such as Sales, Bank, Cars, Loans, Travel, Salaries, Sums owed to suppliers
etc., we are talking about ‘accounts’, e.g. the Sales account, Bank account, Travel
account etc. If it’s easier, think of them as categories under which transactions are
recorded.

Accruals
Accruals concept of accounting

When recording entries in the books, another useful term to be aware of is the
accruals concept of accounting, which means that all entries are recognised in
the period in which they accrue (arise/happen) rather than when they are paid.

Recording entries purely from sums in and out of a bank account is known as
cash accounting, but this is only allowed for tax purposes in the smallest of self
employed businesses.

The simplest example of accruals accounting is where you record a sale in the
books when you send an invoice to the customer, rather than when that customer
pays it, which may not take place for weeks or months.

The double entry for this entry therefore is to debit the unpaid invoices account,
thus increasing what customers you, and crediting the sales account.

Clear Books Must reads | August 2015

 There are several additional accounting adjustments which may be needed to
ensure that you are following the accruals concept in all respects. These are as
follows:

Accrued expenses: Accruals:

This would occur when you do not receive a bill from a supplier but you know that
you have incurred the cost. For example, accountancy fees when an accountant
bills you next month for work done this month, or an electricity bill for this quarter’s
charges that doesn’t arrive, and is dated, next month.

Prepaid expenses: Prepayments:

This occurs when you receive the supplier bill today but it relates to goods or
services that you will not receive until a later date or period. For example getting
billed for insurance or subscriptions a year in advance.

Accrued Income

This occurs when you have sent out goods or carried out work for someone but
you have yet to send them a sales invoice. This would occur in the books of the
accountant above where their income has accrued (arisen/happened) this month
but they don’t send an invoice till next month.

Deferred income

This occurs when you have invoiced someone in advance of goods going out or
work being done. Again, this is the other side to the examples of prepayments
above, where the insurance company or supplier invoices today for a service that
will span a year ahead.

In all of the above cases manual adjustments have to be made to the basic
bookkeeping to make sure that recorded income or expenses are actually reflected
in the correct period.

So adjustments for accrued expenses and income bring entries back into an earlier
period and adjustments for prepaid expenses and deferred income carry entries
forward into a later period.

Clear Books Must reads | August 2015

 Balance Sheet and Profit & Loss
At the end of the year the totals in all of the individual ‘accounts’ are listed to
produce the financial statements (year end accounts). These financial statements
comprise:

Balance Sheet (Asset and Liability accounts)

Profit & Loss (Income and Expense accounts)

Think of these two statements as follows:

Debit Credit Timeframe

Balance sheet Asset GOOD Liability BAD A snapshot on one day

P&L Expense BAD Income GOOD Over a financial period

Balance Sheet

The Balance Sheet is a snapshot of a company’s assets and liabilities on the last day
of the year and, because of the double entry, the difference between these two will
represent the accumulated profits or losses that have occurred since the business
started.

Profit & Loss

The Profit & Loss account is a summary of the financial performance of the
company in the financial year, comparing its income with its expenses with
the difference between the two being either the profit or loss for the year. As
mentioned, it’s not just money in and out.

Trial Balance

You may also hear mention of a Trial Balance which is just one report that
incorporates all the Profit & Loss and Balance sheet accounts above, with the
numbers listed as debits or credits and, hopefully, with the total of the debit
accounts equalling the total of the credit accounts.

Clear Books Must reads | August 2015

 That’s it!

These are the very basics that you need to know to help manage and understand
your finances. We hope this has provided you with some helpful tips to get started
with bookkeeping. We also have lots of further resources that can help you to get
your head around it!

Glossary of Accounting Terms

Weekly webinar

Regular bookkeeping workshops

Double entry bookkeeping support guide

Contact our support team on support@clearbooks.co.uk or 020 3475 4744 Monday

to Friday 9am–5pm.

 www.clearbooks.co.uk

 twitter.com/clearbooks

 facebook.com/clearbooks

 linkedin.com/company/clear-books

Clear Books Must reads | August 2015